Question

A company pays a $2 dividend in a country with a 30% dividend tax rate and 20% capital gains. The share price would most likely drop by how much?

Answer 1

The share price of a company would most likely drop by the amount of the dividend payment. However, the impact may be less due to the dividend and capital gains tax rates.

Step-by-step explanation:

The share price of a company would most likely drop by the amount of the dividend payment, which in this case is $2. However, the drop in share price may be less than $2 due to the impact of the dividend tax rate and the capital gains tax rate. The dividend tax rate is 30%, so the after-tax dividend received by shareholders would be $1.4 ($2 * 0.7). Additionally, the capital gains tax rate is 20%, so if shareholders sell their shares after the drop in price, they will have to pay tax on the capital gains.

Therefore, the share price would most likely drop by $2, but the after-tax dividend received, and the capital gains tax need to be considered when calculating the actual impact on shareholders' wealth.